As if to mark the new name of this blog I have published what I think is quite an important new paper this morning. This seeks to explain modern monetary theory (MMT) as I understand it.
I did, of course, publish a glossary entry on MMT yesterday. This paper seeks to explore the issue in a lot more depth because it deserves it.
I admit you are going to need to put an hour aside to read this. There is quite a lot in the paper. What it does do is explain how I understand that the economy works, and how money works within it.
Doing so, I miss out a great deal of the rather odd arguments that some within the MMT community use to justify how MMT. That is for three reasons.
First, as will become apparent in another blog that I will publish this week, I do not agree with a great deal that some of the founders of MMT say about it. That is because what they say is either unnecessary, wrong or only consistent with far-right political viewpoints, in my opinion.
Second, it is because I very clearly differentiate what MMT says from what flows from an understanding of it. Far too many people confuse these two, and that is inappropriate.
Third, this is because justifying something as straightforward as MMT does not require a lot of nonsense to be said: it is really quite straightforward. The supposed theory that some use to justify MMT is not required to understand it, let alone explain its implications.
I think this paper is pretty fundamental to what this blog is all about. I expect to return to it, and some of its themes, over the coming weeks. For now, it's available to read here. Comments are, of course, welcome.
For the curious, the photo is of the Farne Islands from Seahouses in Northumberland. MMT is about more than blue-sky thinking. It is about steering the economy off the rocks. You might spot the Inner Farne lighthouse in the photo.
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Thank you for this. I liked the summary yesterday….. but this will take time to digest. It is my 30th wedding anniversary so I suspect that if I gave this paper the attention it deserved today then there might not be a 31st!
Rest assured, you will hear from me in due course.
Enjoy the anniversary first
And congratulations
I’ve been sold on MMT for quite some time but how does a ‘modern’ economy (such as the UK) change over to MMT – without the chaos!)
In clearly defined stages or all in one go?
It doesn’t change over
The reality is MMT is what happens
We need to acknowledge it – and so change the behaviour of those who pretend there is no money
Hi Richard
thought you might enjoy this missive from ‘dogwhistledom’
https://internationalman.com/how-the-wealthy-elite-plan-to-pocket-billions/?vgo_ee=71YCkSHjH0razptLqF42aszeMtkA5bzlP85nTCerIuyv%3A63zhnx3LpVSyf%2BsqTgfGk2ccngqk7QDb
As understood by the work of Thomas Kuhn, MMT is an attempt of a paradigm shift. If economics is regarded as a science then it should be open to different subjective perspectives. Since whatever perspective we take does not change what it is that we have observed. MMT has more of an accounting framework than the monetary approaches typically used by ‘mainstream’ ‘economics’. These accounting tools have been with us for centuries and have proven rather successful in monitoring business transactions.
I will read this in great detail at the end of this month, Richard. Looking forward to it. Absolutely snowed under with work at the moment…
best
Howard
Good luck
Well overdue for meeting up
That’s my position too – it’ll have to wait bit because I’m busy too and I’ve only just finished Mattei’s ‘The Capital Order’.
Richard
This looks excellent as the most condensed but comprehensive description I’ve yet seen. Also that you clearly distinguish between MMT as a description of how the monetary system works, and the subsequent choices that it implies.
What I would love to see is a response from a constructive but friendly critic if such a person exists! Not least to understand the lines of attack and how best to respond to them.
So would I
Might Danny B play that role? He probably knows as well as anyone how the ‘opposition’ thinks.
Richard, it will require careful reading, but congratulations on a noble effort to inform.
Enjoyed it .
It would be helpful if there were some more references to show where the role and function of money you deliniate is pretty-well agreed and among whom, and where the disagreements are – with quasi-MMTers and ‘conventional’ economists, neoliberals etc.
Also diagrams/flow charts very helpful to thickos like me.
References usually put people off
Diagrams are coming
‘D – Book Balancing’
‘Although FIAT currencies effectively disappeared throughout the world after the USA abandoned the Gold Standard in 1971….’
Shouldn’t that be ‘effectively appeared…’?
It should have been updated now …..
I posted a revised version
I just wanted to prove that I read it. In case you tested us later or something 🙂
🙂
My attention was caught by MMT about 4 years ago and since then, I’ve put a lot of time into trying to understand it, and the implications. I am not an economist or an academic.
I found myself nodding along in agreement almost all of the way through. I wish I could write as concisely.
In your section on the command of resources, you emphasise that the wartime economy is an extreme example of what is possible. If Government requires to, it can take over the entire productive output of the country. “Few would want this situation to persist in
peacetime.” I believe one implication of the MMT insights is that in any sector, one public sector option is all that it takes, (especially with a Job Guarantee in place), to control the whole sector, no matter how many private actors there are. The nationalised body would set a floor for wages, environmental standards and working conditions. The private sector firms have to equal that or better it to encourage employees to work for them. I’m sure you know this, but thought it worth re-iterating.
My one point of contention is the importance of a Job Guarantee. I have been convinced by the arguments from leading MMT economists that the buffer-stock of jobs is far better than a buffer-stock of unemployed as an economic stabiliser. Not only is it effective almost immediately in fighting inflation, but avoids the widespread social costs of unemployment in communities. Additionally, if we assume a nation is looking to optimise productive output of its working population, it makes no sense to deliberately reduce this output by forced unemployment.
For what it’s worth, from an ‘amateur’, I think this is a really useful paper. I’ll be interested to see how the academic MMT-ers respond.
Thanks
And try as I might I think the JG an intellectual rather than a real world argument premised on assumptions that cannot be replicated in the real world
I will explain more in the final instalment on this tomorrow
I think it is important that the general public really understands that when a bank makes a loan, either directly or through a credit card that the money is “created”, under government license, just for the customer, and that when the customer pays back the loan the money is “destroyed”. The bank makes its money from the interest (usually extortionate) that it charges and not using money that other depositors have in the bank.
Also the enormous media nonsense of “how is the government going to pay for it” question which interviewers think is a knockout question for anyone daring to suggest that government should pay for health service and other essential public service workers properly, or prevent child hunger or starvation and that the money does not come from taxation. The point about the role of taxation being to destroy money to counter inflation is probably lost on most people and will be a hard job to get general consent that this is the case in the present political climate. however, Richard’s analysis really is a boon for anyone who want to promote a sane, humane and ecolical society.
I see that in the context of the explanation, the government is not beholden to the money markets (p.11). But what does that mean for Truss having ‘crashed the economy’? Was there in fact no crisis, or was the crisis misunderstood?
The crisis was misunderstood
And the crisis was in fact created by the Bank of England, not Truss
There was a double misunderstanding
Would the BoE thinking that it needed to raise interest rates enough to refinance the extra government spending with money from the money markets be part of that misunderstanding?
What would have happened if it didn’t?
It is
There was no need to refinance
That is the whole point
I think it is important that the general public really understands that when a bank makes a loan, either directly or through a credit card that the money is “created”, under government license, just for the customer, and that when the customer pays back the loan the money is “destroyed”. The bank makes its money from the interest (usually extortionate) that it charges and not using money that other depositors have in the bank.
Also the enormous media nonsense of “how is the government going to pay for it” question which interviewers think is a knockout question for anyone daring to suggest that government should pay for health service and other essential public service workers properly, or prevent child hunger or starvation and that the money does not come from taxation. The point about the role of taxation being to destroy money to counter inflation is probably lost on most people and will be a hard job to get general consent that this is the case in the present political climate. however, Richard’s analysis really is a boon for anyone who wants to promote a sane, humane, and ecolical society.
Thanks
Regarding, “The role of taxation being to destroy money to prevent inflation” — is that Murphy’s theory of money value, then? I think that’s fine, provided each “coin” is something itself such that scarcity of it actually has a meaning. I mean one withdraws supply of a real good and–supply and demand and the price goes up. But if the good in question has no value internal to itself, like what my libertarian friends say about fiat money, then decreasing the supply can’t just drum-up demand out of nowhere. So sure, one could use taxation to destroy money to lower general prices (i.e., to raise the price of money), but only if we have a mechanism by which some value internal to the coin is input into each coin. Alright, I don’t mean the coins one-by-one, but in aggregate. Mosler (I know, I know, but just pretend no one is fighting about Mosler) said that value comes from the tax liability; if not, then where does Murphy say it comes from–note it can’t be simply from withdrawing the quantity of money via taxation if the money itself is pure paper with no inherent value (such as given by the need to pay bills, rent, buy food, and pay taxes with).
The value coms from taxation, in part.
But also from being the only means to settle legal obligations of all sort.
In other words, the value comes from exchange.
It really is not hard to work out, is it? All those exchanges represent value. Who would have thought it?
@ Richard,
I notice that you haven’t referenced any of MMT’s four leading lights (Mosler, Mitchell, Wray, or Kelton). There’s not so much as a mention, or did I miss anything? Even if there is some disagreement I would have thought some acknowledgement of their contribution was in order.
It’s rather like trying to explain Relativity without referring to Einstein, or Quantum mechanics without Schrodinger or Planck.
I am interested in the ideas.
If you want to see a reference to personalities, try tomorrow’s next instalment.
Why are you not engaging with the ideas?
I believe there is a typo on page 10, where you have
“Although fiat currencies effectively disappeared throughout the world after the USA abandoned the gold standard in 1971”.
Surely this should read
“Although non-fiat currencies effectively disappeared throughout the world after the USA abandoned the gold standard in 1971”
This has now been corrected if you download again
THanks
Thanks very much! Glad to see the money creation of regular banks included as often MMT looks at central bank only – with subsequent lack of analysis, with that in mind I would adjust
(p2) ‘Banks – These exist to:
• extend credit to those who wish to make use of it by way of loans;’
Create credit/money – so it comes as less of a surprise later on!
The failure of MMT as described by Mosler and Mitchell to look at commercial bank money creation is one of its big weaknesses.
From Richard’s blog (https://www.taxresearch.org.uk/Blog/2023/04/18/modern-monetary-theory-an-explanation/):
“I do not agree with a great deal that some of the founders of MMT say about it. That is because what they say is either unnecessary, wrong or only consistent w/ far-right political viewpoints, in my opinion.”
In other words, this is #RMMT, not #MMT.
A while ago, Richard wrote a (interesting and respectful) critique of #MMT, which Randy Wray responded to (both linked to in this post ).
http://activistmmt.org/criticism
That should have been it: “I agree with MMT except not these pieces.”
No. Instead it’s: ” **I** define MMT, not those who’ve developed its massive body of work over the past twenty-five years.”
Importantly, Richard’s new paper contains not a single quotation or citation.
This is called running in front of a parade (25 yrs in the making, developed by LOTS of good people), tweaking it to your liking, then calling it your own – leveraging your quarter MILLION followers.
Someone please explain to me how this is not WORSE than when mainstream economists strawman MMT in an effort to destroy it. Because I’m not seeing it.
—
Response (on Twitter) from Brian Romanchuk:
“The only bit one needs to read of Murphy’s article is where he effectively writes that he has no idea why the people who take economic theory seriously think the Job Guarantee is an important part of MMT.”
This is a shortish explanation of MMT
I wrote it because I could not find one
I asked
What I got – e.g. from Warren Mosler, as I will note tomorrow – was wholly inappropriate
And re JG, read what I have to say tomorrow
But overall, this is what I would expect: you have hurled abuse, not any engagement
The loss is to MMT
And if RMMT it is to be, so what? What is how knowledge moves on.
I will only speak for myself.
I have no problem with RMMT. We should indeed have competing theories!
I have a very big problem, however, with your trying to shove RMMT down people’s throats by labeling it as actual “MMT”.
This makes no sense at all.
I make clear in the paper that what MMT says is different from what flows from it. I would have thought that obvious. I am saying what MMT says.
I then make clear that the policy implications of MMT are not the same as MMT. Do you deny that? Why? The JG is a policy implication.
And then I will be saying tomorrow that many of the arguments used by Moesler and Mitchell for MMT are really rather unattractive to the audience it app[arently appeals to. Is that not allowed?
I personally think I am promoting a very clear form of MMT. If you don’t like that. well, so be it. But you really do need to understand how knowledge develops.
And for the record, I shove nothing down anyone’s throat. You have disagreed, rather unpleasantly and without presenting a single argument as all you have offered are ad hominems, and I have let you do so.
I am grateful for your publishing it and responding (twice).
Making it clear that what MMT says about how money is created and by whom, is very different from what flows from it is fundamentally important. MMT as a description of current practice is much harder to argue with. How it is interpreted and the policies that might flow are much more open to debate and subject to political perspectives.
Conflating to two is not helpful. Amongst other things the interpretation by some that MMT means that there is a bottom supply of money without any downsides that need managing (eg the role of tax in managing potential inflation). This provides an open goal for those who want to dismiss it as ‘Magic Money Tree’.
Many MMT supporters say tax is not needed
That is equally absurd
I agree with you
To be clear, Richard, the problem is not that you disagree (hence, why I’ve not addressed any specific points). The (very big) problem, in my opinion, is that you’ve presented your explainer, which contains YOUR version and vision of an economic theory, RMMT, **AS MMT ITSELF**. Whether you intended to mislead or not, it’s undeniably misled a lot of people, who now think you’re referring to the original (as defined in the quarter of century-worth of literature), and now look to you as a leading MMT figure. You’re not. Ideally, you’re a fellow traveler.
Especially given your substantial popularity, and therefore power, it’s very concerning. That you don’t or won’t see this (as far as I can tell) is even more so.
I will add a note to keep you happy, but your point is spurious
MMT is no one’s property. It is a strand of thought to which I am contributing.
The reality is you don ‘t like that.
And don’t call me a fellow traveller unless you are really trying to promote the idea of a cult. You really ought to understand how damaging to MMT that language is.
Stop complaining and debate
Your methods have now changed the debate from academic disagreement – whether MMT is correct or RMMT is correct – to over whose version of MMT we’re even talking about.
You’re leveraging your substantial following to attempt to usurp a school of thought that has been carefully crafted over a quarter century.
See a post this morning – I politely suggest that none of Mosler, Mitchell, Wray or KJelton can claim MMT either. Abe Lerner possibly could, and he write in the 40s, so your claim to this being a quarter of a century old is slo wrong, as is your curious omission of Minsky and Godley. And as I note, given I came to most of what is called MMT be thinking about money and tax for over a decade I could too, if I want. I’m not though: I am just describing a wide body of thought. Not once do I suggest it is all my own.
A new edition making this clear will be out very soon.
And now, politely, answer the questions or don’t call again, because right now all you price you can do is waste time and it is deeply unappealing when there are issues to address.
Mr Epstein,
I have not engaged in this whole debate in this thread, because quite frankly I see nothing (and have never seen anything) productive about the internal wrangles over MMT as a “theory”; utterly pointless. Money ‘is’ as money ‘does’, and what interests me is solely the description of what people actually do, have done and can do when they make money work. I think Richard is entitled to present his case (he has earned that entitlement). People can disagree; but nobody “owns” MMT, not even Richard – because there is nothing to own. Hopefully the best explanation of money stands up, because it best explains the phenomena being observed.
What doesn’t stand up is this utter guff, that Richard wants to: “usurp a school of thought that has been carefully crafted over a quarter century”. This smells of the rankest medieval scholasticism.
What we want is a robust explanation of observed phenomena that stands the test of complex, changing circumstances. What we do not need is more navel-gazing economic theorising that is concerned to protect the flame of some hackneyed school of thought. MMT’s survival depends on whatever explanation it comes up with that best explains the phenomena. If MMT adapts another, earlier version to explain the phenomena with greater illuminating insight into how it functions then so be it. Test, test, test: endlessly. If it needs replaced by a better explanation, so be it. Endlessly.
MMT isn’t a brand; and if is and you have copyrighted it, you are welcome to it – it is almost certainly guff. So when you start talking about usurping a crafted text, we have moved on from understanding how something functions to creative literature, religion, or metaphysics. The best advice I can then give, in simple terms? You are in the wrong discipline.
That is my only thought on this thread; I knewcommenting wasn’t a good idea. Pointless. Toodle-oo.
But it is a good comment that I appreciate
Mosler’s paper https://tinyurl.com/3fuxjk9r seems to suggest that taxes come before spending (my interpretation):
“1. The US Government imposes tax obligations payable in US dollars.
2. Consequently goods, services and assets are offered for sale to get the US dollars required to pay the taxes.”
But Kelton writes in the deficit myth:
“[In] 1997, [..] a little book called Soft Currency Economics [by] Warren Mosler [..] According to Mosler, the government spends first and then taxes or borrows.”
The first quote does seem to be different to the second. I am trying to get it clarified. But science of any kind does require anyone to ask questions.
Can I ask a basic question, please Jeff.
What is “RMMT”, how in your view does RMMT differ from “actual” MMT, and why is that a problem?
MMT is an explanation of how governments (and banks, under government licence) create money. You can do that without considering taxation, but that is like considering supply of drinking water but not sewerage.
At the most basic level, it is just a description, not a matter of belief or faith – so it seems odd for you to be talking about some sort of dogmatically correct version of “actual MMT”.
I look forward to Jeff’s answer
The difference is explained clearly by NeilW elsewhere in these comments, by Brian at the end of my original comment (above), and Richard himself in this post: https://www.taxresearch.org.uk/Blog/2023/04/19/the-problems-with-warren-moslers-description-of-modern-monetary-theory/
These are fundamental, core differences, making Richard’s RMMT fundamentally different than MMT. Richard is not among the large group of academics those who have developed MMT over the past quarter century (built on the work of Godley, Lerner, and etc.) as documented in The Deficit Myth, the undergrad textbook, and the hundreds of academic papers (many of which can be found via here: https://activistmmt.org/scholarship)
Again, disagreement is to be strongly encouraged. However, applying the MMT label to something fundamentally different is not something one does to work together towards a better economic theory. It precisely distracts from that effort.
With respect, please tell me what is different between what I am saying and what Stephanie Kelton says. Ignore what Warren Mosley is saying: there is no one who is credible that seriously argues that taxation exists to create unemployment. Nor does any credible person argue that inflation is entirely created by government spending. Please answer the question, rather than offer abuse, which appears to be your only stock in trade. You say that disagreement is to be encouraged, but you cannot explain what you are disagreeing about, and until you can. It’s very hard to see how I can justify putting further comments from you up here, simply because you simply repeat abuse.
> Ignore what Warren Mosley is saying: there is no one who is credible that seriously argues that taxation exists to create unemployment. Nor does any credible person argue that inflation is entirely created by government spending.
It seems, at least in part, that you’ve answered your own question.
So you are saying MMT is incredible? And that we have to lose credibility to use it?
Is that the argument?
Why not explain exactly why Mosler is right instead?
I’m sorry, Jeff – I don’t meant to be antagonistic as I do really want to understand what you are objecting to – but I don’t see where you have clearly defined “RMMT” (what does “R” even stand for here?) as opposed to “actual MMT”, and given a clear list of points where Richard’s comments depart from orthodox MMT (if heterodox economics can be orthodox – but I suppose after 25 years MMT has developed its own nostrums and shibboleths).
Brian mentions the jobs guarantee. Is that the only point of difference? Or is there something more?
For me, at least, the jobs guarantee (or UBI, or basic services, or other social provision) is a policy that can be built upon the foundations of MMT. It is not a necessary implication of MMT as a description of the way money is created in a modern economy.
Perhaps you are saying that – for you, at least, and perhaps for others too – “actual MMT” is more that that description, and mandates certain political choices too?
You also mention that Richard has not been part of the group of academics who have developed MMT over several decades. I’m not sure how relevant that is – does that mean he has no right to reinterpret what has gone before, or make his own contribution? Or that he has to distinguish what he means by MMT from what other academics mean? Has he failed to recite the catechism, or give suitable respect to his elders and betters?
I am struggling to understand why the People’s Front of Judea are arguing so vehemently with the Judean People’s Front, when the Romans are still occupying the forum. It is so frustrating when factions on the left embark on these stupid fratricidal battles, as if that is more important than engaging with their common opponents.
You keep alluding to it, but please can you just spell out: what exactly is Richard saying that misallies the “MMT label”? What is he saying that is “fundamentally different”?
I would also appreciate that.
I have assumed that the “R” stood for “Richard”. That RMMT is something based on MMT, with some misunderstandings.
MMT without the state violence
“Unacceptable low paid work would also cease to be a
tool of economic power for employees.”
shouldn’t that read “employers”
Corrected
I will update soon
Thanks
Typo on page 11 Richard.
…government creates thought its spending…
Thanks
Three people read that…..
You say the national debt is not really a debt at all; it is money supply created by the government. But it is debt because, as you say, the money is initially lent to the government by the central bank. All money is debt.
You say the government only issues bonds as sort of banking service to give savers somewhere safe to put their money. If it is not really necessary, why bother? The government has to pay interest to private savers, but central bank loans are interest free.
I get the point that like in war time, the government can afford to spend whatever it takes (although in WW2 the UK was funded by Uncle Sam). But this cannot continue forever. There must be a point of reckoning. Money is not unlimited; there is hyperinflation. If taxation only exists to control inflation by destroying money, there must be a point of fiscal equilibrium. So if a labour government wants to spend more on public services, it has to tax more. If a tory government wants to focus on taxing less, it has to spend less. In that respect MMT is no different from the current orthodoxy.
The debt to the central bank is money – it need not be repaid
Why provide a banking facility? Because right now banks and pensions do not know how to survive without it.
And I indicate the real limit n- it is what is possible. Try to do more and it cannot be done
But you are quite wrong re this is the same as the current orthodoxy
Tax is unrela5ted to spend. It controls inflation – and inflation need not follow money creation – as we know because almost £900 bn was created without it.
You have rather missed the point by ignoring the evidence there
@ Richard,
Of course I do agree with a lot of what you write but not all of it. We’ve already had a discussion on the ‘tax drives money’ aspect of MMT which you disagree with. That’s an “idea” rather than a personality issue. I suspect you do understand the MMT line, it’s all very but you have some quasi-political objection to its implications so you don’t really want to accept it.
That’s not the only thing. You’ve just said “The failure of MMT as described by Mosler and Mitchell to look at commercial bank money creation is one of its big weaknesses.” Again Wray and Kelton don’t say anything different. Are you taking a “Positive Money” view? If so that’s not MMT!
Aren’t you also out of step on whether the monetary base should be counted as debt? If we consider a £ or a $ to be an IOU of the state then its should be treated in the same way as any other IOU. This is not to say that it is but it should be. Didn’t you have a public disagreement with the German MMT economist Dirk Ehnts about this? Or a I thinking of someone else?
You can have as many disagreements as you like of course; however, it is reasonable to ask how many you are allowed before what you are describing as MMT isn’t really MMT at all. There always a collegiate requirement to try to reach some kind of consensus with academic colleagues.
I will try to respond to this cooly, as that is what you demand.
I agree tax helps give money value: I have never disagreed. But please do not say that means I think tax creates unemployment because that is utterly absurd. I will explain in much more depth tomorrow. I do not have quasi-political objections. I have real technical objections. I also think the argument totally undermines everything else MMT says. Apart from that it’s just fine (sarcasm alert).
And it is not an argument to say that Wray and Kelton agree with Mosler. And of course I am not taking a POistive Money viewpoint – which I have always strongly objected to. What I am saying is that tax can be paid with commercial bank-created money. You need to explain how only base money is used to pay tax if you disagree with me. Please do.
And re the money base and debt: tell me how that debt is redeemed at the taxpayer’s choice and then explain how a debt that a person cannot repay is debt?
Finally, don’t you realise the whole point of academia is to disagree? This is who we advance knowledge. I know it is shocking to may in MMT that I might do so, but Steven Hail has already defended my right to do so, without implying he agrees with me. Why do you say I may not do so?
@ Richard,
No-one is saying you, or anyone else, can’t disagree with MMT but the question remains of how much disagreement is possible while still being able to describe your theories as MMT compatible.
I agree the tax creates unemployment line is quirky but and I’d say it also creates employment. If you accept that tax gives a value to money then you can’t be surprised that we’ll all do what is necessary to get hold of something of value. Mainly this is working to get it. So regardless of whether we work to pay our taxes or work to get the money that taxes give a value to, the end result is exactly the same.
“What I am saying is that tax can be paid with commercial bank-created money. You need to explain how only base money is used to pay tax if you disagree with me. Please do.”
If we pay our taxes out of our commercial bank accounts, the first step is that the bank deducts a number from our accounts and credits a number in HMRC’s account. There is no reason why this cannot be in the same bank if HMRC so chooses. However, the role of HMRC is to hand it over to the treasury in terms of Government created IOUs which can then be destroyed. When it is eventually paid to the Treasury it will have to be converted from the commercial bank’s IOUs to BoE IOUs which does mean a transfer from the banks reserve account at the BoE. Base money if you like. Is this what you are getting at?
Was this the point of disagreement with Dirk Ehnts? I didn’t follow the debate too closely.
Let me take these in turn
1) MMT is not copyright anyone. Like gravity, the term can be used to describe a phenomena. We can disagree how to interpret it. I have defined the core of MMT. I doubt you disagree. The rest is politics.
2) The argument on unemployment is not quirky. I think it wrong. See this morning’s post. I will not repeat it here.
3) I have spent a great deal of time thinking about central bank reserve accounts, as have you if you would admit who you are – which you still appear very reluctant to do, so convinced of your arguments do you appear to be. Play a mind game. Suppose all central bank money was eliminated. It could happen. Could tax still be paid in the legal tender of the country alone? Yes. Because there would be bank-created money. So, what happens in the CBRA? There is an overdraft by the bank. That’s it. Done. And wholly possible. So, government-created money is not the pre-requisite for paying tax in government-created legal tender (not the same thing). This won’t happen, but you people like mind games. I just played one.
4) I cannot recall what the discussion with Dirk was about. It was resolved.
And I will add a note on sources to the text today to keep you happy, and my right to say what I have written is MMT
@Richard,
“Play a mind game. Suppose all central bank money was eliminated. It could happen. Could tax still be paid in the legal tender of the country alone? Yes…..”
I would say no and that it couldn’t happen. The obvious point to make about a fiat currency issuing government is that has to issue some fiat currency -either in digital or paper form. Normally the issuing of it is the responsibility of a central bank but there is no particular need to call it that. The Treasury has issued banknotes in the past. See the “Bradbury Pound” which was issued during WW1 when the then privately owned BoE wouldn’t play ball with the Government over the spending requirements for the war effort. The BoE was nationalised by the post war Labour government so there’s been no need for Bradbury pounds since.
Once a government does that it opens up the possibility for anyone else to issue their IOUs which are measured in the Government’s currency of issue. You and I, for example, could issue our own IOUs in Vietnamese Dongs if we wished. Whether anyone would accept them is another matter but we would always have to be able to convert them to real Dongs on demand to establish credibility. This means that real Dongs do have to exist.
I did not say it would happen
I said what if it did?
You did not answer the question.
And the simple fact is that if the government said pay your tax in our currency then the fact it made none would make no difference that there was no g0vernm,ent created money in use.
But you did not engage with that point.
You made up a claim that ignored a) legal tender and b) that tax could not be paid in made-up currency.
It’s a little irritating that you will not answer the points made with logical answers. It defe3ats the point of debate.
Might you have another go?
No discussion of imports or exports.
At first this looks like a GreenNewDeal 2008 oversight where aviation fuel was not mentioned.
Is this there a reason exports in particular are not included in your analysis, or was it overlooked with it being a rather large subject matter if you flesh it out to its reverse Occam’s Razor fullest.
No discussion of Union power either. Public sector unions can push harder and deeper for increased compensation because their paymasters have the MMT option available. Private sector unions can’t advance the same argument for higher pay.
You make two points
This is about MMT – and so government spending
MMT says exchange rates float and so reflect real balances of trade
I was not sure that needed resaying
Your last point simply reveals a rather unattractive prejudice
Echoing others – I will read with interest – it will become one of my standard reference works. Sadly, one person who is unlikely to read with interest is a lying tory imbecile & it is an MP and is called Gibb.
Here he is on LBC:
https://www.youtube.com/watch?v=orWq9G-2CXQ
The lies kick off @ 0.50 when he claims that his government borrowed £450bn from capital markets to fund Covid. “capital markets confident enough to loan this…” etc.
Possibly I’m missing something here but:
https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4206.htm (all about QE)
The interesting aspect is that nobody on the panel challenged this lying piece of tory gristle that most gov support was via the BoE and QE (aka printing money).
Corbyn was on the panel & did well – but failed to put the tory properly in his place.
There is a very very long way to go when lying tories (are there any other types?) can get on to TV and not be challenged on their lies about the economy.
Thanks Mike
All good, and I shall be recommending it to various people. One suggestion for improvement is to add a table of contents (with clickable links), as this will highlight to people its contents, and provide a quick way to move around the document.
Noted!
I thought that your description of MMT basics was beautifully clear. But I wasn’t quite so taken with the implications side – though from the interchange above I discover there may be economic dogma issues I am happily unaware of.
In particular: your explanation of QE left my thinking somewhat tied in knots. Given the clarity of so much preceding it that was a pity. And introducing the idea of a financial transactions tax seemed to come from nowhere and raise more questions than it answered.
My final worry was that you seemed to be addressing the theory of an idealised currency isolated from the rest of the world, rather than the real-life way in which economies and their currencies interact. It isn’t clear to me that one government having an interest rate policy that disregarded what was happening in the rest of the world wouldn’t risk market consequences of Trussian proportions. Regardless of any natural virtue in low interest rates, it would risk upsetting the other prime aim of central bank (government) control of the money supply of limiting inflation.
Jonathan
I think you miss the point
Government’s do not need markets
Markets need governments
Truss had a crisis because she thought she needed the Marley
If she had understood she did not she would have just said ‘your problem’
She might also have understood the BoE created that crisis. She did not. Bailey must be eternally grateful Truss covered up his mess
Basically I think there are many voices shouting from different perspectives and the whole interest rates rising is basically the Americans needing to strengthen their currency in response to so much money printing but although we printed lots of money too. we can not handle the trade issues of the strong dollar and Europe also follows suit but in a smaller fashion. This is tantamount to a currency war however whom is to not perhaps predict that the US CBDC will not be adopted by UK and Europe? Perhaps the Americans want to create a new western currency to counter BRICS they are launching the pilot in a few months. Who is to say that the plan is to eventually do away with the Dollar and the Euro and the Pound and perhaps even the Austrailian and New Zealand Currencies also….
It’s worth noting that America have squeezed the Debt Market around the world for the Petro Dollar and they want to hold themselves up as the “Safe Haven” whilst on a reckless path but their economy is much more resource rich than Europe and the UK. They can Squeeze and win and take a lot of investors in whilst capital flight from Europe and the UK. It’s also worth noting the USA’s strategy in World War 2 where they armed both the Germans and the UK and they swooped in late and took all the spoils this is something that they would like to replicate given the chance.
I am not at all Anti American but they want to look out for themselves naturally so should everyone else. It’s not that simple though I get it but power plays are just that and it is an obvious power play.
The Interesting thing about your write up on MMT is that they are indeed using taxation and interest rates to tame inflation on only interest rates, although previously you were stating that taxation was perhaps not even neccesary. It is like a pair of sliding doors or gates to narrow down purchasing power of the average citizen aswell as devaluing or debauching the currency yet the OPEC+ decision to cut oil production is yet to be seen weather this will increase inflation with decreased demand? This last point although politicians complain about external events and these can not be discounted it boils down to being prepared having adequete reserves to cope and NOT being in debt and setting a good example to their citizens whilst actually having control of core essentials (Health /Energy /Military/ Farming/ Water/ Transport/ communication/ minerals, commodities and metals) not selling everything off to foreign entities and if possible being self sufficient to a reasonable degree. We have pretty much sold out and over populated and we are now at the whim of many external forces and there is not much we can do about that right now, We have by all intents and purposes lost a lot of control of our destiny in the UK, we are small punch above our weight for now, but on the decline it seems inevitable now. we have positioned ourselves in to weakness.
I would predict a U-turn by the end of May or June to open those sliding doors of taxation and inflation but to leave us with a badly devalued currency.
You do realise all major currencies have used QE?
So what are you saying?
Yes QE increasing the money supply creating inflation currency devaluation. But I feel where the differences from the QE experiment recovery will differ is being “in control” of fundamentals or essentials and resources.
The USA have a clear ability to recover far more strongly than do the UK and Europe let alone many poor developing nations. Exposing Value and backed by resources and strength not just flimsy fiat. The flexing in the Fiat markets will pronounce either strength or weakness.
QE does not increase the money supply, per se
As I explain in the ‘explanation’, the spending that preceded QE increased the money supply
Hi Richard, I enjoyed reading that – it was very well presented, straight forward and concise. I liked how you separated the economic model from the practical implications of the theory.
Someone reviewing this without prior knowledge of MMT should, after a first pause for reflection, see how much better this theory models the economy than the household budget model. (Which must be one of the aims and a plus). Hopefully the MMT crowd can agree with something like this as the fundamental axioms, but suspect that is a forlorn hope.
Many thanks
Ken
Ps
I read the following 3 times before I understood it, so I suspect there is ambiguity in the use of the word ‘figure’ that could be ironed out. —>
A great many of the wealthiest European countries have overall tax rates that exceed forty per cent of their GDPs. Many more come close to that figure. None exceed it.
Thanks Ken
I will review that paragraph
I am open to improvements, of course
Hi Richard,
Have you sent a copy to Bill Mitchell?
Do you know if he has read it.
I get the impression you are on good terms with Steve Keen – has he, or any other prominent MMT advocates offered any comments/suggestions. It could be viewed as a sot of peer review process
Keep up the good work.
Regards,
Chris
Steve and I will be discussing this live on 29/4
I think he is sympathetic
Yes, both Steve Keen and Michael Hudson have reservations on policies that are proposed by some MMT proponents:
https://www.nakedcapitalism.com/2020/04/the-use-and-abuse-of-mmt.html
https://www.patreon.com/posts/some-preliminary-18916190
https://www.youtube.com/watch?v=QyzKblOtZjg
I am aware I am far from alone on this issue.
I have just downloaded this paper and will attempt to get to grips with it. Thank you for producing it, and for attempting to make MMT understandable to people like me, who are challenged when it comes to understanding finance.
I am not all that smart when it comes to how money works in the economy, but I do vote—same as yourself—and I want to learn as much as I can, so I can make the best choices at the polling station every time.
Thanks Jan
Thank for the hard work here and for sharing the boom freely. An important contribution to challenging the flawed economic thinking that dominates macro policy in large parts of the world.
I commend you for starting with a definition as this is a startling omission in many MMT texts. I would prefer a slightly different one – but that’s just an opinion – and a clearer distinction between the descriptive elements of MMT and the prescriptive elements of MMT.
One of the reasons why MMT still struggles to gain traction in mainstream debate is that attention jumps quickly to prescriptive elements and policy choices. Your second sentence runs the risk of this repeating itself.
FWIWI, I think Keen comes closest to the best definition of MMT – MMT is simply an accurate description of how the modern monetary system works, That’s is all we need to know to make the transition. Current policy is made by parties of all sides on the basis of a flawed understanding of money, and how the monetary system works. This needs to be corrected.
After a revised, simpler definition, I would follow this with the key reasons why MMT differs from other thoughts. Wray does this quite well in his introductions and Kelton does this via here five myths framework. I think your text would benefit from this right at the start.
The material on the four economic actors is interesting but I am not sure that it is unique to MMT. It does perhaps provide a link to Godley and others which can be helpful. That’s is after all how I stumbled on MMT. On my second attempt to understand it, it dawned on my that this was building on Godley’s sector balances approach which is core to my own work.
Above all, MMT needs to be depoliticised. The fact that the prescriptive elements of (US versions) of MMT and the fact that elsewhere MMT is wrapped up in an aggressive/offensive narrative helps rather than hinders. Does Keen really need to make videos that highlight how he likes to laugh at mainstream economists. Does that move the debate forward??
Macro policy making is fundamentally flawed. An inaccurate understanding of money and the workings of the modern monetary system lie at the heart of this problem. MMT provides an accurate description of money and how the modern monetary systems functions in practice and should be the foundation of future policy debates*
(* a pipe dream at the moment as the next U.K. general election will be framed around a false narrative and one that Labour will tie themselves in knots over)
Thanks for the hard work and sharing here. Hope my comments are taken in the spirit intended. This is an important initiative. Our futures depend on it.
Bravo, so far!
Hi
I rather hoped I had made that split….
There will be further editions of this though
I will be updating it today, in fact
I know of two typos and I will adding a few more comments
Thanks
I wonder if there is an exception that might cause some confusion, in the form of building societies. Traditional BSs did indeed take in deposits and lend out funds as mortgages. I was writing financial models for them back in the 70s and they had to manage their finances very tightly, maintaining a safe level of liquidity. Far better managed than banks – all those tight fisted Yorkshire folk!
Then came deregulation under Thatcher and many building societies converted to banks whilst banks charged into the mortgage market. Those BSs were no longer constrained by their deposits and together with the banks that has led to the flood of money into housing which is a primary cause in house price inflation. BSs went out to the markets to raise extra funds to lend and in due course we had the collapse of Northern Rock and others.
I suspect that most people still think of banks as being no different to BSs – taking deposits and lending them out. Might be worth highlighting that difference somewhere.
It is true, that is what they did.
Credit unions still do.
But they weren’t banks
So they are not an exception as such.
I enjoyed reading this, all very clearly explained. I copied what I thought we key points –
It is important to note that what is called investment banking, …, is not what is described as banking by MMT
There is nothing more complicated to the process of money creation than the making of these promises.
Fifth, money paid to the government by way of tax then ceases to exist. It is not used to fund spending. It simple ceases to exist.
The MMT approach to the command of resources is the polar opposite of that in neoliberalism. MMT seeks to do what is possible. Neoliberalism seeks to constrain what is possible.
all that a government deficit represents is money spent by a government into the economy
Growth will require that there be more money in use and it is the job of the government as curator of the currency to supply that money. [What I often explain to people]
The whole of QE is a sham to disguise the fact that this direct funding of the government by its central bank is going on.
He blogs, usually daily, at Tax Research UK – [needs correction]
Richard,
Reading through your explainer I find that some of your statements are unjustifiable from the MMT literature, in particular:
Page 4: “Thirdly, [create an ongoing usage dominance of its currency] … it must spend it into use.”
Warren Mosler, in particular but other in general, contradict this by placing the usage dominance in the use of the State Monopoly of Violence to enforce the collection of debts denominated in the government currency. This is exemplified by the many times Warren has presented his “Business Card Currency” example. YouTube videos show this example being publicly used as early as 2013 when Mosler publicly discussed the topic with Murphy moderated by Carney. He is known for using this variant of Hut Taxation to make his point for both: the initial creation of 100% unemployment in terms of the Currency, and then ongoing demand to enforce usage of the currency through taxation.
Yes, the Government Credit must be created before it can be redeemed but the creation of the credit has no causative power to ensure it’s usage in contrast with demand for currency created by debts (e.g. taxes, fees, etc) in terms of the currency.
Pp5-6: “Fourthly, having spent… [it] will tax… it has two reasons for doing so:”
Your subsequent Part a) includes at its core a quantity theory of value and I am utterly confused why you would advance such a flawed model for inflation. Mosler has, in late 2022 if I recall correctly, put out a model/mechanism for inflation that is not based on any quantity-type logic but instead views inflation as a function of institutional power. In very brief summary: the central bank with the highest institutional power forces credit prices down through the economy via the interest paid on deposits in tandem with the government issuing interest paid as coupon rates, lower entities then pass on that price as their institutional power allows. Other high power institutions and entities will then attempt to collect the greatest economic rents possible and force other price increases down where their power allows (e.g. major manufacturers will push along logistics price increases caused by the institutional power of shipping companies onto distributors who repeat that to retail chains who then repeat that onto consumers). This analysis you present also runs along side many of the spurious assumptions about people’s propensity to save/spend which were prominently espoused by Friedman when he was justifying his “Helicopter Money” straw man.
Transaction taxes are not necessary to drive currency usage, at its most basic a National Hut Tax achieves that objective. It is a trivial thought experiment to build a model of a taxation system where there are no income or transaction taxes but “taxes” in the form of fees paid for activities (e.g. court fees, transit fees, company operating fees, authorities to perform certain roles such as doctor/ lawyer/ accountant/ teacher/ nurse/ childcare/ etc) which then drives the usage of currency within the jurisdiction. Your explanation here is very weak and to the point of misleading. This understanding then bleeds into page 7 where you repeat the inflation claim.
If you really want to base your economic belief on the state monopoly of violence you can, but as far as I am concerned, that is a worldview I found repugnant, and I have no time for anyone wishing to use it.
As for Mosler’s theory of inflation: it is laughably wrong. I can’t be bothered to discuss it. It is, again, all based on violence, as is the transition tax argument (see my blog post).
This is all rather unsavoury, isn’t it? And yet what the core of MMT has to say is useful. So I will rejustify it. And I will call what I describe MMT, not least to save those who would really not prefer that their worldview is based on violence from embarrassment by association with your interpretation of Mosler’s view.
So the sum of your reply is “I don’t like that the State has a Monopoly on Violence, and on Currency, and uses those two things to provision itself… therefore Mosler et al are wrong.”
That’s a lot of hand waving and not much substance.
I’m sorry you can’t be bothered, because I found your implied quantity theory system to be something I could discuss but generally with derision.
Please evidence this theory of state violence against people in general in a democracy
Violence is always repugnant and unsavory. That doesn’t make it any less of a reality.
I will address this issue in a blog post today.
What I will say now is that your use of the word violence is, in my opinion, wholly inappropriate and indicative of an attitude that I find utterly repugnant.
I also note that certain patterns of your posting here are remarkably troll like. I think that we have had enough of your abusive commentary.
What a strange Hobbesian place to start an economic theory, Andrew C (sorry, another Andrew here). The state monopolises violence and then uses that power to torture its subjects into doing things they don’t want to do? They are all unemployed and only work because the state demands it?
Does anyone actually live in a state like your “trivial thought experiment” or is it just a fantasy? Perhaps tax havens could survive on “fees” of one sort or another, but they tend to use the US dollar one way or another.
Could it be that the modern democratic state exists to give its peoples security and wellbeing, and to enable us to work productively together, to achieve more as a group than we would as isolated insecure individuals worried about starving to death or being violently oppressed by agents of the state.
Is it basic assumptions about human behaviour that are at fault here? Are we unthinking unfeeling automata, or social animals?
(Still waiting for a reply from Jeff above, but as this blogpost is below the fold now, perhaps it will never come…)
The UK Government has a monopoly on violence, so does the US, member EU states, Japan, China, Korea, etc etc A state monopoly on violence is why the State can imprison you but if you imprison someone you could see punishment; nothing Hobbesian here. Yes, States use that to collect taxes… it’s called tax enforcement. I’m amazed that Richard was reacting like that statement was something overly shocking but if he wants to play-act about the situation it doesn’t help his case.
Actually people regularly bring up some smaller jurisdiction (like Brunei, IIRC or one of the Near East countries with plenty of oil) which has no income taxes.
These fees are also implemented in different forms around the world already; NESA in Australia is a government entity which levies annual fees for school teachers and not having those fees current can result in being suspended or fired from jobs. The idea of the fees NESA charges in Australia being rolled out to other activities: having a vehicle legally registered to drive on the road (oh wait, that’s real), using the courts (oh wait, that’s real), running an incorporated entity (oh wait, also real), having permission to manufacture or dispose of hazardous goods (oh wait, also real), … the trivial thought experiment is to remove income and transaction taxes and expand those fees which already exist to more areas instead. You get the same “demand drives usage” scenario without a transaction or income tax.
As I have already noted to another commentator this morning, I will be posting on the issue of supposed violence by the state later today. But, those who endorse the idea that tax is backed by violence are now, as a matter of fact, not welcome on this side.
If you think it’s appropriate to promote an economic idea on the presumption that there is a malign state that exists to impose violence on those it governs then I fundamentally disagree with you as a matter of principle, whilst accepting that, as a matter of fact, such things can happen. In that case you can make your comments elsewhere, but you will not promote that thesis here because I find it completely unacceptable.
So your example of a state that exists only on fees is Brunei, a small oil-rich absolute monarchy, with a population of 500,000, where oil makes up about 90% of its GDP and gives it among the highest GDP per capita in the world? Or another unidentified oil rich middle eastern state? Fine, but there might be a few problems with generalising from those rather exceptional special cases.
(And in any event, while Brunei has no personal income tax or capital gains tax, there is a 55% tax on petroleum company profits and 18.5% tax on other corporate profits, a 5% employer social security contribution and 3.5% pension contribution, and 10% withholding taxes on some payments to non-residents.)
Of course fees are charged directly or indirectly for all sorts of things, from issuing driving licences to incorporating a company to delivering water to taking away the rubbish. But there are some public goods that you are going to struggle to fund entirely with a use-based fee, at least in an equitable manner that is acceptable in a democratic society.
The idea of replacing all taxation with fees like that suggests to me a virtual abolition of the state, replacing all public services with private services funded by fees by the users. Will I need to pay a fee to the police each time I report a burglary? Or when I want the street lamps to be switched on? Would the state’s role be relegated to putting cash in the hands of people who could not otherwise afford the fees? Or would those unfortunates just have to get by as best they could without those services? Sorry, you can’t afford to educate your children, or see a doctor, or have your rubbish taken away, or get the documents you need to vote. Let us know how that works after some country has been brave enough to give it a try.
You don’t have to start with the proposition that the state has a monopoly of violence – by which I think you mean legitimate coercive force, rather than actual physical violence. I just don’t accept the underlying assumptions that your framing implies.
Well said
“That same thinking also fails to understand the causes of inflation,
by suggesting that it can only be caused by a government refusing to spend enough into the economy to employ all those that the proponents of the job guarantee suggest are made unemployed solely because of the imposition of taxes.”
This is incoherent. I think there is a typo. It is a suggestion, but not one made by MMT, that inflation can ONLY be caused by a government SPENDING MORE (not “refusing to spend”) …
I referred to Mosler’s argument, which I shared
“There is no economic logic to this claim. There are many causes of unemployment, but imposing taxes is not one of them.”
There is no economist who believes this. Every economic theory says that raising taxes raises unemployment and reduces output, and lowering taxes reduces unemployment and raises output.
Simply not true
If tax reallocates resources to those who spend from those who don’t it increases output and employment.
If you do not know that then I can’t help you and will be deleting your comments as they are obviously of no value.
You helpfully illustrate two points:
‘No economist believes this’ – there are a lot of economists full of the neoclassical religion they have had pumped into them who believe it but that’s by no means all. Those who understand MMT tend not to be in that group. And quite a few others including those who understood the failings of austerity and who spotted Truss/Kwarteng coming a mile off.
‘Every economic theory’ – from that great school of ‘it’s fine in theory but would never work in practice.’ And it’s not the case in practice.
However it’s what those trying to justify low tax/small state self-servingly want to believe.